German Constitutional Court and Parliament on euro zone aid

There are so many moving parts in the European debt crisis, it is difficult to keep track of them all. Der Spiegel reminds us today of another stake holder that might have slipped by most observers and that is German Federal Constitutional Court. A hearing early next month (July 5th) to hear complaints that the year-old Greek aid package violates the EU Treaty. The case is being brought by an MP from the CSU (part of the governing coalition CDU/CSU/FDP) and a group of constitutional lawyers.

The key issue seems to be whether the Greek aid violates the treaties that prohibit a transfer union or a bail out of sovereigns and if the role of the German parliament has been abridged.

It is not clear how the Court will rule. The article makes much hay of a seemingly off the cuff comment by the head of the court. It may be read to suggest that Court will not rule that the aid package is unconstitutional, but articulate some conditions that preserve the role of the Germany’s parliament.

Yet this is a path fraught with risk. A permanent mechanism (ESM) would seem to further surrender sovereignty of parliament insofar as it (ESM) decides who gets future aid packages not the Germany parliament. The Court then could rule that Bundestag–lower house of parliament–has to approve each case in which financial assistance is advocated.

If other countries do not take similar measures, the German parliament would retain a veto over the ESM. It is, after all the largest financial contributor (Germany is to provide ESM with 21.7 bln euros and provide guarantees for another 168.3 bln euros).

Of note, the German paper reports that one of the law professors speaking for a plaintiff quotes a couple of French officials, including Finance minister Lagarde, who is the most likely successor to DSK at the head of the IMF: "We violated all legal provisions [last May] because we wanted to appear unified and truly rescue the euro zone." Der Spiegel also quotes France’s Trade Secretary, saying a year ago that the EFSF "is expressly prohibited in the European Treaties."

While these French comments are not particularly helpful, it is not clear that they will have much legal standing in the German constitutional court. However, the point is that the German court adds another element of uncertainty in the debt drama and may shape the particular outcome. There is some danger that parliament’s prerogatives are defined to include the upper house as well and there Merkel does not enjoy a majority.

Der Spiegel does not address the upper house role, even though a study by Constitutional experts, earlier this year, suggested the bailout and mechanism were so controversial that approval by both houses may be needed and by a larger majority than Merkel enjoys in the lower house.

As intractable as the economics of the European debt crisis is, politics seem to be the real stumbling block.

Marc Chandler joined Brown Brothers Harriman in October 2005 as the global head of currency strategy. Previously he was the chief currency strategist for HSBC Bank USA and Mellon Bank. In addition to frequently providing insight into the developments of the day to newspapers and news wires, Chandler's essays have been published in the Financial Times, Barron's, Euromoney, Corporate Finance, and Foreign Affairs. Marc appears often on business television and is a regular guest on CNBC and writes a blog called Marc to Market. Follow him on twitter.